Fed cuts bond buying, eyes inflation

Federal Reserve Chair Janet Yellen is slowing the asset-purchase program known as quantitative easing.

The Federal Reserve's policymaking board announced today that the central bank will shave another $10 billion from the asset purchases it makes each month to stimulate the U.S. economy.

The Fed bought $55 billion in bonds last month, as it continued to unwind its program of asset purchases known as quantitative easing, or QE. This reduction represents the fourth in a series of $10 billion reductions, the first of which occurred in December. QE was at an $85-billion-per-month pace when the Fed began tapering.

Interest rates remain unchanged. The federal funds rate, the interest rate at which banks and other depository institutions lend money to each other, will remain targeted between zero and 0.25 percent, as it has since December 2008.

The Fed's shriveling stimulus

The central bank thinks the economy needs less of its bond buying but more inflation and lower unemployment.

Mark Hamrick

Washington Bureau Chief, Bankrate.com

Greg McBride

Chief financial analyst, Bankrate.com

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Fed facing a softer housing market

The statement released by the Federal Open Market Committee did include a brief nod toward the slowing housing market.

"Business fixed investment edged down, while the recovery in the housing sector remained slow," the statement from the Federal Reserve said today.

"The spate of indicators showing softness is quite clear. I think most analysts view this as a speed bump and not a wall," says Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities.

Mortgage rates shot up last year as the Fed began discussing the end to QE. The average 30-year fixed rate is up 25.49 percent from May 1, 2013, according to the Bankrate.com national index.

The (housing) data hasn't been too great," says David Nice, vice president and economist at Mesirow Financial in Chicago.

That's due to a few factors. "The rise in rates, even though they are still historically low compared to what we have seen over the past couple of decades, coupled with cold weather" have softened the housing market, Nice says. "But also, housing prices have gone up quite quickly, so that might give buyers pause."

How did unemployment, inflation factor in?

Higher-than-desired unemployment and lower-than-desired inflation are still sore spots in the economy. The FOMC statement acknowledged the discrepancy between the targeted sweet spot for the economy and reality. As in past statements, the rate-setting committee offered assurances that with appropriate accommodation, the labor market would gradually move back to the Fed's objective for maximum employment.

Lagging inflation is still causing concern at the central bank, however.

"The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term," the monetary policy statement reported.

The central bank has a dual mandate of promoting maximum employment and to keep prices stable. Though the labor market has made surprising gains over the past two years, price stability has put up a little bit of a fight.

"They have a dual message on inflation these days, as well: 'We want it to be well anchored and not a problem, but we're also worried about disinflation,'" Bernstein says, referring to a slowing in inflation rate.

"It's not so much about broadly falling prices, but slower growing inflation. They have explicitly targeted 2 percent as the target inflation rate and the key measure of it, the core personal consumption expenditure (PCE) deflator, has decelerated.

"While the Fed traditionally worries about inflation as an upside risk, here they have an additional worry of the downside risk," he says.

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